We've compiled four years of Tom's articles and blogs into a new book titled It's Not Rocket Science: Plain-English Advice for Managing Your Investments. The pieces are short narratives that reinforce some of the basic, yet most important, principles of investing. Below is a description of the process we went through in self-publishing.

One of the goals of Steadyhand is to change the investment landscape in Canada. To that end we intertwine our marketing and investor education objectives by providing educational content on our website, blogging frequently, and by Tom’s bi-weekly column in the Globe & Mail.

We’ve long toyed with the idea of publishing a book of Tom’s writing, and this summer spent some time investigating the process. We were initially dismayed as we were told that to go the traditional route of conceiving an idea for the book, writing it, and then working with a publisher would take us about a year and a half before the book was available to the public. While there is tremendous value in what a publisher brings to the table (editing, marketing, design, etc.), the process seemed onerous and we didn’t want to wait that long.

Being self-starters, we decided to self-publish, and treat it as a learning exercise (which is how we treat many of our marketing initiatives).

We shifted our focus to creating a book that was a compilation of Tom’s best writings over the past four years, including many of his Globe & Mail columns (which he owns the rights to). The columns have been edited by the G&M, so we decided to forgo hiring an external editor to work with us. We spent a lot of time selecting the best articles (we have over 600 blog postings) and grouping them together into chapters focused on specific investment themes. The result was 34 articles grouped into 8 sections, for approximately 140 pages.

After some research, we chose lulu.com to print and publish the books. Lulu is an open publishing platform that allows users to upload content and self-publish books in a variety of formats. While we could have used Microsoft Word to create the book contents for Lulu, we ended up using the LaTeX system for its superior typesetting. This involved downloading the blog articles from our website, converting them to LaTeX files and then generating a PDF of the book’s contents. While we were very happy with the results, LaTeX is not for the faint of heart and requires a high geek-quotient to master. We designed our own book front and back cover using Apple Pages.

We test-published a version of It’s Not Rocket Science and then took the plunge and ordered 1,000 soft cover books (for a cost of roughly $2 per book). We announced the book on our website in late November and provided PDF and ePub versions, and a follower of the company created a Kindle version for us as well.

We decided initially not to charge for the book – our goal was to spread the word about Steadyhand while educating investors, and we consider this a powerful form of marketing.

The results so far have exceeded our expectations. We’ve distributed over 600 books, and the electronic versions have been downloaded over 800 times. There have been a number of positive reviews on the web, and the feedback from readers has been extremely positive. On the marketing front, the book has been referenced in a number of venues in which we don’t normally appear, so we feel that we’re introducing Steadyhand to possible new clients. We’ll be monitoring the results of this closely over the coming months to determine how it helps build our business.

As I outlined in an earlier post, we feel that our fee reduction program is unique in rewarding clients who entrust more of their money with us, and who keep it with us for an extended time. In this posting, I’ll delve in to some of the gory details of how we calculate and pay out management fee rebates (MFR’s).

Background: How the Funds Pay Fees

As with other mutual funds, unitholders in our funds do not pay managements fees directly. Instead, the fund itself is charged the management fee on a daily basis - the fee is an expense of the fund and therefore reduces the returns that the fund generates.

As a simple example, a $100 million fund with a 1.00% MER would be charged the following management fee expense each day:

$100mm x MER/365 = $100mm x (1.00%/100) x (1/365 days) = $2,739.73/day

If the fund’s assets remained unchanged over the year, the total management fee expense to the fund would be:

365 days x $2,739.73/day = $1mm (or 1% of total assets, as expected).

Of course, the total value of the fund changes daily due to inflows/outflows and the fluctuations in the values of the securities held, so the management fee charged each day also changes.

While the management fees accrue daily, they are actually paid to the fund manager on a monthly basis. This is how Steadyhand generates revenue.

The fund itself does not track the portion of the fee that each unitholder pays each day, it only accrues the total management fee expense of the fund.

Reducing Fees Through Rebate Distributions

While the fund doesn’t directly track the allocation of the management fees to each unitholder, it is possible to calculate it, using the same math as above.

The management fee that each unitholder in a fund “pays” each day is:

(unitholder assets) x (fund fee %)/100 * (1/365) = daily fee

For example, an investor who held $10,000 in our Income Fund (which has a simple fee of 1.0%) would “pay” the following fee each day:

$10,000 x (1.0/100) x (1/365 days) = $0.27

Because unitholders don’t pay management fees directly, we aren’t able to individually reduce the fees. However, we are able to rebate the management fees individually by paying unitholders management fee rebate distributions (i.e. additional units given to the unitholder at no cost to them). This reduces the effective fee for the unitholder.

Steadyhand pays for the MFRs distributed to unitholders, thereby reducing the effective management fee that we receive from the funds.

When direct clients (i.e. those who do not purchase our funds through a broker or third party) open more than one account and indicate that they wish to consolidate their accounts, we create a “portfolio” for them. This is simply a portfolio ID that is assigned to all of the accounts they hold with us. Rebates are paid on each fund held in each account in a portfolio. The same rebate rate is applied to all of the holdings in the portfolio.

The key to all of this, of course, is calculating and tracking the amount of the fee rebate distributions due to each unitholder.

Calculating Rebate Distributions

In the same way that the funds calculate and accrue the management fees each day, we calculate and accrue the unitholder rebates daily as well. The calculation and accrual is done in our recordkeeping system, which tracks the units held by each unitholder in the funds.

The first step in determining the daily rebate accrual amount is determining the overall portfolio discount rate for that day. Discounts are based on the total assets under management in the portfolio as described here, and are applied in tiers (i.e. the first $100k is at the full fee, the next $150k is at 80%, etc.). As shown in the fee calculator tool, if a unitholder had $150k in her portfolio of accounts, her rebate amount would be 6.67% of her fees paid that day.

Once we have the overall discount rate for the portfolio, we apply it to each holding in each account in the portfolio and calculate the fee rebate in dollar terms for the day. This is determined by using the formula:

daily rebate amount per holding = (fund holding $) x (fund fee)/100 x (1/365days) x (discount rate/100)

For example, if a couple held $250,000 in their portfolio on a given day, the rebate percentage for that day would be 12.0%. If one of the holdings in one of the accounts was $20,000 in the Income Fund (with a 1.0% fee), the rebate amount for that day would be:

$20,000 x (1.0/100) x (1/365) x (12/100) = $0.06575

As a simple check, the annual fee that would normally be paid on an investment of $20k in the Income Fund would be $200 (1% of $20k), while the total rebate amount would be 365 x $0.06576 = $24, which is 12% of $200. When we pay out the $12 of MFRs to that holding, we are effectively reducing the fee paid by the unitholder by 12%.

The daily rebate amount is added to the accrued rebates for each holding. In other words, for each fund that an investor holds in their portfolio, we calculate the day’s rebate amount and add it to the current accrued amount for that holding.

Paying Out Distributions

Each month the accrued rebate amounts for each holding are paid out to unitholders in the form of distributions (MFR’s), thereby increasing the number of units the client owns. The accrual ‘buckets‘ are reset to zero to begin accruing again the next day.

If a client redeems a fund entirely, the rebate distributions are first paid out and then the redemption is processed so that he does not lose the accrued MFR’s.

Rebates generally begin accruing on purchase trade settlement dates (when the money is received by Steadyhand), and stop accruing on redemption trade dates (when the order is received/processed).

Rebates are taxable in non-registered accounts and show up on client T3’s. They also increase the cost base of the holdings.

Finally, rebates lead to higher performance, as they increase the market value of a position without requiring a corresponding cash outlay from the unitholder.

Last week I published our deliberations on whether to launch a client referral program.

We had good response via the blog’s comments, email, and in person. In part this was because we asked for feedback, and in part it was because our clients were passionate about the issue.

While there were a few who favoured the idea of being directly rewarded for referring new clients, the majority felt that it tarnished our reputation of integrity, and made us look too much like the banks. Most of our clients have indicated that they are already referring us to others because they’re happy with our offering.

We’ve decided that the reputational risk isn’t worth any potential upside, so we won’t be proceeding with the referral program.

As an aside, we found the exercise of sharing an interesting business issue with our readers to be very helpful, and will be doing more in the future.

Everyone in the investment industry knows that summer is a slow time for opening new accounts. It's a given that we should accept that investors go on holiday and the last thing they want to think about is retirement planning, let alone the perceived headache of transferring accounts to another firm.

I don't think we should accept that line of thinking.

I think that summer is when many of our clients have more time to reflect on their future, and that we should make a push to be part of that future.

One of the marketing ideas that we've had since the beginning of the firm, yet never acted on, is a client referral program. The idea is certainly not a new one, yet it is not commonly used in the mutual fund industry (at least in Canada).

I'm proposing that we pilot a two-month project this summer to see if a customer referral program would work at Steadyhand. The hope is that by rewarding clients to open new accounts or refer new clients to Steadyhand, we can turn the summer into a busier period than it generally is.

Here's how it would work:

• The program would run July 1 - Aug 31st.
• We create a referral code or "key" for each client, and email the key along with an announcement of the program to clients.
• The client can use the key when they open new accounts, or provide the key to others to use when they open new accounts.
• Each new account that is opened with the referral key will result in a "reward" to the client that referred the new client/account.

Some of the issues that we are are grappling with are:

• Does this cheapen the Steadyhand brand? There is the perception that spending $25 or $50 for a client referral is different than spending $25/50 per new client on advertising. I think we can get around this by being clear and transparent in our communications around the program - and let's be honest, we are trying to build a business and are willing to experiment with different means of acquiring customers. There is also some concern that we will look too much like the banks ("open an account and receive a free toaster"). 
• Will it actually work? Is a reward enough to change client behaviour? It wouldn't be a lot of money for our clients, but I'm OK with that. The intention isn't to give a large reward for referrals, but just to nudge people to take some action. We have a number of ideas for rewarding clients:
  • a $25 or $50 management fee rebate
  • waive fees for a quarter (3 months) or longer
  • donate to a charity on the client's behalf
  • entry into a draw for one year's fee rebate
  • 10 tickets to the third round of the Toronto Maple Leafs 2010-11 playoffs run!
  At the moment we make a point of sending a note of thanks to clients who refer new business - perhaps that is sufficient.
• Do we alienate clients who open up accounts outside of the program window? Will existing clients feel like they were somehow ripped off because they didn't get the fee reduction? I think our answer to this simply has to be that we are experimenting with all avenues to continue to grow our business.
• Are there any privacy or regulatory issues? Securities regulations would seem to require us to notify both the prospect and the client of the reward. We currently don't tell anyone, including the referror, when a new client signs up. We would have to obtain permission from both parties to allow this exchange of information.

As you can tell, this has generated a lot of internal debate, and I'm not sure that we will actually ever try it out; however, I thought the discussion would make for an interesting blog post.

We'd love to hear your feedback on whether we should proceed with this pilot program (post your comments below). 

• forms (both internal and external)
• company wiki and Intranet
• internal spreadsheets and tools
• tacit knowledge (the worst way to store business rules - in people's heads)

The firm is particularly proud of the first award – Best Mutual Fund Performance for the Week of July 23rd. Steadyhand is also honored for being recognized as the 7th Runner-up in the Best New Mutual Fund Name category, for which they took home some beautiful hardware.

Steadyhand joins a select group of 97 other firms receiving the sought-after recognition. The company’s President and founder, Tom Bradley, commented on the achievement: "Winning these awards has given our marketing department a real boost. For a while it felt like we were the only fund company in the country without an award. Now we can market from a position of strength."

For a description of the lesser-known Lipper Awards, see Jonathan Chevreau’s blog on the Wealthy Boomer.

The problem is that each of our mutual funds is a separate trust, so they issue their own T3's. In addition, each account has its own registered address, and for privacy reasons we often cannot combine all T3's for a household (i.e. spouses) in a single mailing. As a result, our recordkeeping provider issues a separate T3 in a separate envelope for each fund in each client account. This has resulted in some clients receiving as many as 13 separate mail pieces, something we're obviously not thrilled with.

While we don't know the exact solution yet, we can promise that next year we'll do better. We're working with our provider to find a solution that meets our regulatory requirements while also meeting our commitment to reducing mailings.

Just for fun, we selected a number of popular blog and Globe and Mail articles, and surprised Tom before Christmas with a hardcopy book of his writing. You can download an ebook version here (296kB, pdf, Adobe Reader 8 or higher required). We'd love to hear your thoughts on it.

1. Taxable income in a mutual fund consists of:
   1. net income: Canadian and foreign dividends, plus interest, less management fees and administrative expenses.
   2. net taxable capital gains: taxable capital gains, less capital losses and taxable capital gains that remain untaxed due to the capital gains refund.

2. The management fees that we charge to the fund are partially offset by the management fee rebate that we distribute to the unitholders quarterly. The fee rebates are paid out of the income and capital gains of the funds, and in turn, Steadyhand reduces the management fee that is charged to the fund. Unitholders receive the rebates in the form of distributions.
3. Taxable capital gains/losses occur when the fund managers sell securities at a gain/loss. Some of the taxable capital gains do not have to be distributed and can remain in the fund on a non-taxable basis, as they have been distributed already on redemptions of fund units throughout the year (i.e. they have already been taxed). This is the capital gain refund.
4. Mutual fund trusts (i.e. the Steadyhand funds) are flow through entities. The taxable income earned inside the funds flows through to the unitholders as if they held the securities directly. The income/gains are taxed in the hands of the unitholder at his/her marginal tax rate.
5. Income and capital gains are earned by the fund throughout the year and reflected in the net asset value per unit (NAVPU). When the distribution is made, the income and capital gains realized are divided by the number of units in the fund to arrive at the distribution factor (i.e. the distribution per unit). Distributions are allocated to unitholders based on the number of units they own.
6. Reinvested distributions are deemed to have been received by the investor in cash and reinvested back in additional units of the fund. This increases the unitholder's total adjusted cost base (ACB), which results in a lower capital gain when the units are redeemed. This also means you are not taxed twice on the capital gain distribution amount.
7. Capital losses do not flow through to the unitholder or offset income distribution amounts. If a fund has positive income distributions and a capital loss, they do not offset each other; the fund pays out the full income distribution amount and the capital loss is carried forward.
8. Distributions are reported to Canadian residents on a T3 slip issued by March 31 of the following year.
9. When units of a fund are redeemed, the unitholder may realize a capital gain/loss.
10. A return of capital (ROC) from a trust is essentially a repayment of the investor's capital, and can happen when a trust pays out more in distributions than it earned in income (i.e. there is not enough income to cover the distribution, so some of the original investment is returned to the investor).
11. ROC reduces the ACB of an investment, thereby increasing it's capital gain when sold. The ROC is shown on the T3, but is not actually taxed.
12. ROC from income trusts in the funds flows through to the unitholders of the Steadyhand fund.
13. While the total distribution amount is known at year-end, the allocation of income and capital gains for a fund are not known until the mutual fund trust itself receives T3's from the trusts it holds. Steadyhand is not able to issue T3's for the funds until after this happens.
14. At year-end we initially classify the distributions entirely as income, however, when the T3 is issued it shows the correct allocation between income and capital gains.

1. Theory - emphasizes that investment returns are primarily a reward for risk, and provides a basic introduction to the theory behind the returns generated by various asset classes. He also provides a sound introduction to the value of portfolio diversification.
2. History - describes the historical returns generated by different asset classes, and the times when the markets have become separated from reality.
3. Psychology - explains why many of us are bad investors.
4. Business - why much of the investment industry is structured in direct conflict with investors best interests.

Katsenelson believes that we are in a range-bound market, defined as a market that goes up and down, but ultimately ends up back where it started. He believes that this market will end around 2020, and will be characterized by a period of gradual P/E compression. Traditional value investors who buy and hold stocks for a long period of time will fare poorly in this type of market.

The book provides a sound analytical framework for evaluating stocks, the Quality, Valuation and Growth (QVG) framework, and delves into absolute valuation tools. Katsenelson advocates an active buying and selling process during range-bound markets, and emphasizes the importance of stock selection and the selling process. One of the reasons I like this book is that our managers all focus on bottom-up analysis and stock-picking.

I thoroughly enjoyed this book and feel that its ideas are relevant to investors in any market.

Frankly at this stage it is an experiment, but we're inspired in part by this article.

If you're a Facebook user, give us a poke and feel free to add suggestions and comments and let us know how we should evolve our presence there.

The first attached image is for a fictitious client, Jim Smith, who has three accounts: an Investment account, RSP account, and Joint Investment account. The boxes on the page are used for identification for the purpose of writing a specification (in fact, this image is from our internal specs). We won't go through all of them as many are obvious, but this gives a good sense of the work involved in rigorously defining a statement.

The data elements on the page are:

• D2 Client Since - the earliest account opening date for all of the accounts in the portfolio. This is used when we calculate fee rebates based on tenure.
• D5 Market Values - we show market values for all accounts in the portfolio
• D6/D7 Consolidated Holdings - we consolidate holdings across all accounts, by fund
• D8 One Simple Fee - this is our standard one simple fee on each fund
• D9 Weighted Average One Simple Fee - the weighted average simple fee, before rebates
• D10 Total Fee Rebates - the rebates you received during the statement period. This is calculated by summing up all the rebate transactions during the statement period. This is the subject of another (long) post, but we calculate portfolio rebates daily and then pay them out at the end of the quarter. If applicable, each fund in each account is paid a distribution at the end of the quarter, and the total of those rebates is shown in this field.
• D11 Your Fee ($) - this is the actual dollar amount of the fees you paid during the statement period. For each fund we calculate the fees paid during the statement period, and from that we subtract the total rebates that were distributed, resulting in the the actual fees paid on each fund.
• D12 Your Fee (%) - the actual fee you paid.
• D13 Your Weighted Average Fee - based on the actual fees you paid (after rebates), we determine your weighted average fee for the period.

As far as we know, we're the only mutual fund firm in Canada showing the actual fee paid in dollar terms on a statement. We hope this changes.

The second image shows how the page looks without the definition boxes.

In a separate posting I'll discuss how performance is calculated, both at an account and portfolio level.

Individual account performance is calculated by our recordkeeper using the time weighted rate of return (daily valuation) method. At the end of each day, performance for each account is determined by factoring out cash flows and then using the formula for daily rate of return: R = (Ending MV - Beginning MV)/Beginning MV. Performance for the month is calculated by geometrically linking the daily returns together: ((1+R1)*(1+R2)...*1+Rn))-1. We export the monthly returns for each account into our wealth management platform, which calculates 3 month and annual performance numbers by geometrically linking the monthly performance numbers.

It's worth pointing out that on our statements we only show performance data at the account level if we have 3 full months of performance data. In addition, account performance is only calculated if we have a full month of data, i.e. an account established mid-month will not have performance figures available until the end of the following month.

Portfolio performance is calculated in our wealth management platform each month, and then monthly performance is geometrically linked together. The performance of a portfolio for a given month is determined by using the weighted average of the individual accounts' rate of returns based on the market value of each account at the beginning of the month. For example, if we have two accounts with beginning market values of $70k and $30k, and monthly returns of R1 and R2 respectively, we would calculate the portfolio performance for the month as R = (70/(70+30)) * R1 + (30/(70+30)) * R2.

As with the account performance numbers, we only show consolidated portfolio performance figures if we have at least 3 full months of performance data (i.e. at least one account in the portfolio has three months of performance data).

The attached diagram shows most of the major functions and associated systems:

• custodial and settlement services are provided by RBC-Dexia
• fund accounting and valuation services are also provided by RBC-Dexia
• our investment managers use various trade order management systems and RBC-Dexia's Viewfinder application to manage the funds
• recordkeeping services are provided by The Investment Administration Solution (IAS)
• we interact with other brokers and dealers via FundSERV
• there are operating bank accounts (in trust for the funds) for receiving and sending money to clients at RBC
• we use Xeye as our wealth management platform

We rely on our outsourcing partners to provide their expertise and scale. The beautiful part is that our internal operations are simple, and we literally don't own a single server. The downside is that we have to be very diligent in monitoring our providers, and in particular, the various interactions between them.

In future posts I'll dig into each of these functions in more detail.

Philosophy and Objectives
Our costs for managing a $10,000 account and a $150,000 account are not that different - it seems only fair to share the benefits of scale with the larger unitholders. Over time as our overall business scales we hope to pass on the benefits to all unitholders, but that's another story.

Philosophically we want to reward our larger unitholders, encourage them to stay, and (to be honest) attract more assets.

Differentiators
Of course every high net worth counseling firm has a low fee structure or rebate program; however, we think we're different because:

• we start providing fee reductions at a much lower dollar amount, $100,000
• we reward tenure with the firm

Issues
We (well, Tom and I) naively believed that implementing the program would be relatively simple, but as we work through the processes and systems for the business we came across a number of issues. Note that this posting is not official policy - we're still working out the details of the program design and the rules may change at any time.

Some of the issues we came across were:

• grouping of accounts - the plan works by determining total assets under management and then determining a percentage fee rebate to be allocated to all of the accounts in the grouping. The key issue here is determining which accounts can be grouped together. We ultimately decided to only allow grouping for:
  1. accounts owned by an individual
  2. couples who have signed up to receive consolidated statements at the same mailing address. The idea is that they make their investment decisions together and have allowed each other to see their respective holdings.
• how do we rebate fees? - we considered different fund classes but ended up deciding to rebate in the form of distributions. Each class of units has additional fund accounting and valuation costs associated with it, and moving units from one class to another for the sake of lowering fees could trigger tax consequences. It was simplest to rebate fees in the form of distributions back to the unitholder.
• quarterly vs. daily accruals - initially we thought we would simply take the total AUM for a group at quarter end, calculate the fee, and then rebate back units to each account/fund combination in the group. The problem is that over the course of the quarter there may be different accounts in the group (for example a couple gets married), or an account may be transferred out. We need to track the total assets each day in the grouping of accounts, determine the rebate owed each day, and accrue over the quarter. In the case of a transfer out we can then rebate the fees immediately.
• direct vs. indirect clients - as we have limited information on clients who are unitholders via third parties (e.g. discount brokers), we don't have the ability to group accounts and only calculate the fee rebate on a per-account basis.
• form of rebate - we only pay out rebates in the form of distributions of additional units to the unitholder. Cash distributions would be too costly to administer.
• getting locked in to a plan that just isn't working for us our the unitholders - the simplified prospectus allows us to change the plan at our discretion; however, we obviously do so at the risk of angering customers.

In my next posting on this topic, I'll discuss the mechanics of how we will implement the program.

Way back in October we started the process of building the site by determining three simple goals:

• to educate our clients
• to service clients in a cost-effective manner
• to get new clients

• existing clients
• prospective clients
• general investing public
• media
• potential employees

Scott Ronald then produced a spreadsheet listing all of the content and features we wanted on the site. We then went through a variety of exercises to organize the content (the 'information architecture') and after some testing with users came up with the site map shown in the image. We made some deliberate decisions to minimize the amount of basic education and tools on the site; we felt that our users would already be educated enough in these areas. We also choose to integrate the blog and the site as seamlessly as we could.

The next step was to marry the content with the design of the site. We searched for the right firm to work with us on this, and in mid-November chose Burnkit, a local web development/creative agency.

Initially, Burnkit spent a lot of time getting to understand our business model and how we felt we were different from the rest of the industry. They developed a creative brief and then pitched us on some creative concepts for the site, including the 'Don't fear the bear' idea.

December/January was spent on four areas:

• Burnkit developed the graphic design for the site, which manifested itself in design templates and standards
• we shot the bear videos (a story unto itself) and Burnkit edited and developed the flash elements in the site
• Scott and a writer from Burnkit spent a tonne of time developing the content for the site
• our content management vendor configured the environment used for editing and hosting the site. For compliance reasons we need to keep all past versions of the site and show that our compliance officer has approved the site.

Early February up until launch was a frenzy of marrying all of the features of the site together and looking after the myriad of details required for a site of this size. There are still a lot of areas we have to tweak (e.g. search, usability of the blog), but we're very proud of the first version of the site.

The site took the better part of five months to complete and if we include the cost of our internal resources, cost between $150-200k to complete.

Piece of cake.